A mortgage is a type of secured loan in which real property is used as collateral.
The legal effect of a mortgage depends on the state.
A majority of states follow lien theory, under which a mortgage is seen as merely a lien on the secured property.
This does not sever a joint tenancy.
Under this theory, a mortgagee is not entitled to possession before foreclosure.
Some states treat a mortgage as a conveyance of the property to a lender which is returned when the debt is discharged.
In a title theory state, the mortgage has the theoretical right to take possession of the secured property without foreclosure.
If there are multiple liens on property, generally liens are given priority based on who was first-in-time to file the lien on the deed.
- However, the purchase money mortgage has priority has a priority over other liens.
Mortgage contracts usually have due on sale clauses.
Due on Sale Clause
A due on sale clause requires that any outstanding payment on a loan be repaid when a mortgaged property is transferred.
In the absence of a due-on-sale clause, one may still buy the property subject to the mortgage or may agree to assume the mortgage. (Bottom of 793)
Deed of Trust
A deed of trust is when a third-party trustee holds title to the property and sells it in the event of a default to repay the creditors.
About half the states recognize the deed of trust.
Installment Land Contract
An installment land is when a buyer agrees to pay the purchase price in installments over a period of years. The buyer typically receives possession of the property during the contract period, but the seller retains title to the land during this time and transfers it at the end thereof.
Installment land contracts usually contain a clause stating the seller has the right to terminate the contract in the event of a default, regaining possession without legal process and retaining all previous payments.
Installment land contracts are often used as an alternative to a mortgage, but some states treat land installment contracts as mortgages.
Some states have provided recourse for the naturally harsh consequences of installment land contracts, such as allowing the buyer to redeem the property or to challenge the forfeiture provision.
A foreclosure occurs when there is a default on a mortgage.
In the event of a default, there are three options:
- Strict Foreclosure
- Classical approach where the mortgagee takes possession of the property.
- While still theoretically available in a few states, most foreclosures involve a foreclosure sale.
- Judicial Foreclosure
- Judicial foreclosure is when one uses the judicial process to take possession of the property and sell it in a public sale.
- Available in every state
- Non-Judicial Foreclosure
- Also known as foreclosure by power of sale.
- Non-judicial foreclosure is when one takes possession of the property and sells it through a term of the contract granting them power of sale.
- Not every state allows enforcement of such clauses.
In either type of foreclosure sale, the mortgagor has the right to redeem the mortgage by paying the entire balance of the debt. Some states provide a statutory right of redemption, allowing the mortgagor to redeem the property even after the foreclosure sale.
Right of Reinstatement
Contracts can and some state statutes do allow for a right of reinstatement, allowing a mortgagor to cure his default by paying all past-due amount.
This generally must be done early in the contract early in the foreclosure process. Illinois's statute requires it to be paid within 90 days of receiving notice.
If a sale's value exceeds the balance of the mortgage, the extra must be paid to the mortgagor.
Judicial foreclosure is where a full judicial proceeding is used to take possession of and effect a public sale of the foreclosed property.
Judicial foreclosure requires joining all person with interests junior to the mortgagee. If one is not joined, his interest will not be terminated.
Process of judicial foreclosure:
- Notice of default
- Lawsuit filed
- Mortgage accelerated
- Equitable right of redemption
- Judgment of foreclosure & sale of property ordered
- Statutory right of redemption
- Sale of property
- Possible statutory right of redemption
- Debt repaid
Some states allow mortgage contracts to grant the mortgagee the power to sell the property in the event of a default.
These non-judicial foreclosures, also known as foreclosures by power of sale, allow the mortgagee to conduct a public sale of the property on his own, but still require notice to be given to the interested parties.
If it is deed of trust mortgage, the sale would be conducted by the trustee instead.